Europe's new financial services gem
The past two years have brought about a sea change in the financial services industry, and the effect on financial centres as we know them has been immense. In terms of fund jurisdictions, we are seeing Dublin and Luxembourg, the two main fund jurisdictions in Europe, lose some of their attractiveness, at least in broad terms and particularly relative to Malta.
Malta has been generating a lot of interest of late. As a financial services centre, one of the most interesting aspects of the country today is its potential for substantial growth, particularly as a fund domicile and notably for alternative investment and hedge funds.
What has happened to Dublin and Luxembourg, up to now obvious choices for the funds industry? Luxembourg is unpopular with governments throughout Europe, because of concerns over tax evasion by its private banking clients and its insistence until recently on maintaining banking secrecy.
Dublin is a very well regulated fund centre, but its reputation has been damaged immeasurably by the country's banking debacle, for which the government must bear some responsibility in terms of lack of oversight. When managers hear that the regulations require the appointment of an 'Irish-based bank' as custodian, they are likely immediately to assume this means an Irish-headquartered bank, as opposed to a stable foreign bank with an Irish subsidiary.
Given that the domestic Irish banks are heavily involved in property lending, many managers fear a further collapse of those banks, and none of them would relish the prospect of ending up owning Irish government paper or being reliant on the country's national credit rating.
By contrast, Malta does not have any of these problems and is now Europe's third largest centre for cross-border fund business. It is currently substantially less expensive than any other credible European financial centre, or indeed than those in the Caribbean or Britain's crown dependencies.
This may only be a temporary benefit lasting a few years as Malta's economy and prosperity grow apace, but to day it represents a distinct competitive advantage for the country's fund industry. In addition, the population is well educated and there is good availability of qualified staff.
Maltese regulation is strong and complies with EU requirements, but the Malta Financial Services Authority has shown itself to be pragmatic and business-friendly, ready to be proactive in helping businesses to find a solution within the law and the regulations. This is a very unusual and refreshing attitude to find with any regulator.
The big uncertainty for the fund industry in Europe and elsewhere is how the EU's Directive on Alternative Investment Fund Managers will evolve between its current draft form and the final legislative text, but it is likely that those managers that wish to sell into Europe will establish a European fund and probably establish a European-regulated management company.
We have seen the migration of managers out of the UK start in a fairly small way, but the word on the street is that a flood is building up. Whether that will go to Switzerland, whose reputation has been severely damaged by the UBS tax evasion case in the US, or to other centres is an open question. But if the business seeks a home anywhere vaguely in the European time zone, Malta is likely to benefit.
Dermot Butler is chairman of Custom House Administration and Corporate Services
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